The (Growing) High Price of an Unreformed Crop Insurance Program

Just when you think the facts and figures around federal subsidized crop insurance can’t get any more outlandish, new numbers emerge exposing the out-of-control spending and lack of accountability for this area of farm policy.

Earlier this month, USDA released the most recent data on crop insurance costs. It’s ugly: the federal government anticipates doling out nearly $16 billion for the program in 2012, an all-time record.

Crop insurance costs so much to operate for three basic reasons:

1. It covers a portion of participating farmers’ premiums. This ends up being 62 percent on average of the total cost of an individual farmer’s premium. This is a “farmer” subsidy that goes straight to the crop insurance companies in the form of a premium payment.

2. Insurance companies directly bill the federal government for overhead costs and administering the program.

3. Besides having the ability to bill the government directly for administering the program, crop insurance companies collect reinsurance payments on policies they take out with the government to make up for what they would characterize as “excessive” loses.

Federally subsidized crop insurance is a government/private partnership offered by 15 companies nationwide. These firms include the likes of Wells Fargo and John Deere Insurance Co., as well as foreign companies like Switzerland’s Ace Ltd. and Australia’s QBE Insurance Group.

These companies have thousands of agents who offer federally subsidized crop insurance (with lavish government backing) to farmers and provide indemnity payments if individual farmers incur crop or revenue loses. Many farmers purchase 70, 75 and even 80 percent coverage on the potential revenue of crops planted.

With the devastating drought in 2012, a new record was also set on the indemnity payout side of the ledger. At $11.4 billion already paid out the total cost could balloon to as much as $20 billion once all the numbers are in.

This cost, bore by the crop insurance companies, sounds substantial, but consider this: between 1989 and 2009, crop insurance companies averaged a 17 percent return on equity at a time when the “reasonable” rate was just under 13 percent, according to a report done for the USDA (in 2009 alone, crop insurers enjoyed an astounding 26 percent rate of return, more than double what was reasonable for that year). No wonder agricultural insurance company income increased 1,200 percent from 1993 to 2009. These companies are doing just fine and are quite happy to have the taxpayer foot the bill.

And while crop insurance helped cover some individual farmer’s crop/revenue losses, it makes you wonder: is this really how farm policy should function? Just juxtapose the payout and cost statistics with the fact that U.S. farmer net income was $144 billion in 2012, second highest in three decades, and only trumped by last year.

Increasing farm income is good, but crop insurance is contributing to an increasing problem in rural communities: income disparity. The biggest operators are in the best position to take full advantage of the money train, leaving smaller producers and beginning farmers out in the cold (currently there are no limits on the amount of premium subsidy a producer can receive). As was reported by the Food & Environment Reporting Network:

“Among the 486,867 farming operations that got federal crop insurance last year [2011], more than 10,000 received federal subsides of $100,000 to $1 million, according to data released this month…Twenty-six got more that $1 million.”

“In short, federally backed crop insurance has long since evolved into yet another form of corporate welfare, whose direct costs and perverse unintended consequences outweigh its purported public benefits.”

Future of Crop Insurance

But things could get worse, since there is a real drive in Washington to make crop insurance an even bigger player in federal farm policy. The theme seems to be this: sacrifice everything related to conservation, new farmers, organics, commodities, nutrition, and local food spending, but keep crop insurance untouched and even enlarge it.

Crop insurance is already the largest farm-related expenditure in federal ag policy. It’s budgeted at roughly $90 billion over a 10-year period. But a few more years like 2012 and that budget will be blown out of the water. With increasingly volatile weather and the intrusion of cropping systems into fragile lands that struggle to produce a decent yield, it’s likely we’ll see more expensive farm country disasters.

As we’ve pointed out previously, LSP believes crop insurance has its place as a tool for farmers to manage risk, especially in years—liker 2012— when natural disaster strikes. But, bad weather or not, under the current circumstances we’ve got a policy that is causing increased economic disparities in farm country and negative environmental consequences on the land while producing exorbitant profits for a few. And taxpayers are footing the bill.

As one farmer I work with recently told me, “The mathematics of this program just leave you bewildered, something has got to change.”

Congress failed to pass a new Farm Bill in 2012, missing a prime opportunity to reform a wasteful and unaccountable crop insurance program. How and when farm policy will come forward in this new Congress is unclear. When it does, LSP will be demanding reform while standing up for programs that support conservation, beginning farmers and our rural communities. See LSP’s recent statement on our Farm Bill priorities here.

Adam Warthesen is an LSP organizer who works on federal farm policy issues. He can be contacted at 612-722-6377 or adamw@landstewardshipproject.org.